The pound reached the strongest level in 19 months against the euro after Bank of England Governor Mark Carney said the institution may raise its key interest rate from a record low earlier than investors expected.
Sterling gained versus all but one of its 31 major peers even as Carney said higher borrowing costs might stretch homeowners burdened with debt and derail the recovery. Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting the benchmark rate will increase 25 basis points by January, versus May before Carney’s speech. U.K. government bonds declined, with two-year yields climbing to the highest since June 2011.
“Carney has helped deliver a repricing of the market,” said Michael Sneyd, a currency strategist at BNP Paribas SA in London. “Even from here there is more room for the market to bring forward rate hiking. We continue to like the pound.”
The pound appreciated 0.4 percent to 79.77 pence per euro at 4:19 p.m. London time and reached 79.74 pence, the strongest level since Nov. 13, 2012. It advanced for an eighth day versus the 18-nation common currency, its longest run of gains since April 2010. Sterling rose 0.2 percent to $1.6962 and touched $1.6992, the highest since May 6.
The U.K. currency gained 1.8 percent against the euro this week, the most since the period ended Feb. 8, 2013. Sterling climbed 1 percent versus the dollar, the most since April 11.
The pound has strengthened 9.1 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as the U.K.’s economic recovery shifted speculation to the timing of the first increase in central bank interest rates and away from bets the BOE would add stimulus. The euro gained 1.6 percent and the dollar rose 0.3 percent.
Reports this week added to evidence of a robust economy, showing U.K. unemployment declined more than expected and industrial production rose at the fastest annual pace since 2011. Carney’s comments set him at odds with the European Central Bank, which cut interest rates and announced additional stimulus measures last week.
In the wake of the ECB’s decisions, investors who want to profit from the Bank of England’s shift in bias should buy the pound versus the euro, Geoffrey Yu, a senior currency strategist at UBS AG in London, wrote in a note dated yesterday. The firm’s longer-term target of 75 pence per euro “now looks achievable far earlier than the 18-month horizon originally anticipated,” he wrote.
In his address to the gathering at the Mansion House in the City of London financial district yesterday, Carney said there are still risks to the recovery, including the strength of the pound, and any policy tightening will be “gradual and limited.”
“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced,” Carney said. “It could happen sooner than markets currently expect.”
The BOE’s key interest rate has been at 0.5 percent since March 2009. As recently as last month, Carney signaled officials were prepared to wait until next year to raise interest rates as the recovery could keep strengthening without fueling inflation.
“It was only a few weeks ago that Carney sounded a dovish note, so the contrast is certainly marked,” said Jane Foley, a senior currency strategist at Rabobank International in London. “That’s why it’s got the market’s attention. As long as the U.K. data continues to surprise on the upside, there is further downside potential in euro-sterling.”
Speaking at the same event, Chancellor of the Exchequer George Osborne promised the Bank of England new powers over mortgage lending to prevent the strengthening housing market derailing the recovery.
Sterling extended its gains after Fitch Ratings Ltd. affirmed the U.K.’s government bond grade at AA+, with a stable outlook, citing strong gross domestic product growth.
The U.K.’s two-year yield jumped 13 basis points, or 0.13 percentage point, to 0.86 percent, after reaching 0.89 percent, the highest since June 8, 2011. The 2 percent gilt due in January 2016 dropped 0.215, or 2.15 pounds per 1,000-pound face amount, to 101.81.
The 10-year yield climbed as much as eight basis points to 2.79 percent, the highest since March 11. The extra yield investors receive for holding 10-year gilts instead of German bonds was at 138 basis points, the widest since before the euro’s introduction in 1999, based on closing-price data compiled by Bloomberg.
Gilts returned 3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries earned 2.9 percent and German securities gained 3.9 percent.